Title: Barbarians at the Gate
Rating: 5 Stars
This book is a bit dated (it was published in 1992). Even so, it’s one of the non-fiction classics of the business world. Just like Too Big To Fail is a great depiction of the financial meltdown that caused The Great Recession, this is a great view of the merger madness of the 1980s. Reading this in conjunction with the corruption exposed by Den of Thieves will give you a brilliant, if jaded, picture of a time when junk bonds ruled the world.
For those of you who weren’t around during this time, during the 1980s people started to realize that some corporations were dramatically undervalued. These corporations were conservative, staid companies that had existed for decades. They were institutions in company towns. They considered themselves part of the community. They weren’t great risk takers but they produced significant cash. People bought and held the stock, not expecting great returns but understanding that their investments were safe.
Some smart people on Wall Street understood that these companies were actually worth far more than the stock market valued them. From this understanding, the idea of leveraged buyouts (LBO) was born. A consortium could, based upon the company’s assets, get a huge loan. They could then use that loan to buy the company and take it private. They would then sell the individual components of the business and ruthlessly cut costs on the remains. Great riches would result. The fact that in so doing thousands of jobs would be lost and that those company towns would be decimated did not enter into their calculations.
RJR Nabisco was such a company. The cigarette company RJ Reynolds was started in 1875. Nabisco, originally called National Biscuit Company, was started in 1898. Nabisco is most famous for Animal Crackers, Fig Newtons, and Oreos. Not dramatic businesses, but RJR Nabisco generated billions of dollars of cash every year.
Its CEO was Ross Johnson. Johnson appeared to be interested in two main things. One was the high life. He did love his private jets, New York apartments, limousines, and rubbing shoulders with celebrities. The other thing he seemed focused on was his next adventure. In fairly short order, he’d become the CEO of Standard Brands. When Standard Brands merged with Nabisco, he eventually manipulated his way to CEO of Nabisco. Similarly, when Nabisco merged with RJ Reynolds, he forced the board to oust the current CEO and install himself.
Now, he’d reached the pinnacle. There weren’t other mergers that could reasonably be contemplated from which he could emerge on top again. Other than working deals, he didn’t appear too interested in the actual execution of business (a bit unfortunate considering that he was, well, the Chief Executive Officer).
He was also frustrated with the stock price. Floating in the 40s, he knew that the stock was actually worth much more, but this was during the time when the tobacco industry was under heavy fire, so no matter how well the company performed, it seemed that the stock price was stuck.
There’s really no other word for it. Johnson was bored. Someone came to him with the idea of a management led LBO. He was immediately excited. This would be a huge deal, and with no board or shareholders, he could run the company however he wanted (and oh yeah, get filthy rich in the process).
Thinking that this would be a great adventure, he kicked off the process. He took on Shearson Lehman Hutton as his banker. Shearson was so desperate to get into the LBO business that it accepted his somewhat insane terms that would have left him with both tremendous power and wealth.
However, once LBO blood is in the water, the frenzy will start. Specifically, KKR, the kings of the LBO, heard that RJR Nabisco was in play and began to create their own bid. First Boston, once the LBO king itself, wanted to put in a bid in a play to put themselves back on top. With a deal expected to be around fifteen billion dollars, even more sharks jumped in. Goldman Sachs, Morgan Stanley, Salomon Brothers, Drexel Burnham Lambert (the junk bond kings), and many other specialty firms got into the frenzy.
Once the dust settled, the initial management LBO offer of $75 (remember, the stock price was in the 40s when this started) was greatly overshadowed by the final bid made by KKR of $109. It goes without saying that this final bid was financed largely by junk bonds and having to service the junk bond interest rates would result in a fire sale of subsidiary companies and a couple of thousand layoffs. The surviving workers at RJR Reynolds felt that they’d been taken over by a conquering occupying army.
Ross Johnson ended up resigning immediately. He got a generous golden parachute, but he lost use of his precious corporate jets and housing. Although very well compensated, he was buried in the avalanche that was of his own making.
I shouldn’t be surprised by now, but it still is shocking how much of the drama was caused, not as a result of some intricate, complex business analysis, but by short, stocky, emotionally crippled men compelled to prove their manliness. This is a story of grudges, greed, daddy issues, boredom, and spite.
For real, a merger between the two main bidders, which would have saved them so much money and hassle, was derailed over an argument over which firm would get the cherished left hand side of the tombstone announcement of the deal.
At another point, when the RJR Nabisco board was meeting to decide between the two remaining offers, members of KKR would stand outside the men’s room. Every time a member of the board would come out to use the bathroom, one of the junior members of KKR would sidle up to the adjacent urinal and try to glean details of the discussions. These are grown men probably being paid six figures to do this.
It’s ridiculous. Keep in mind that when you’re watching some news articles about some high minded, seemingly intricately complex transaction, behind the scenes the same kind of activities are happening that wouldn’t be out of place in an elementary school yard.
dorkenstein 